Greece's $600bn gas reserves to fuel recovery?

If there was ever a flicker of hope that Greece could tackle its colossal public debt and return to some form of financial stability then perhaps the country’s estimated $600 billion of natural gas reserves is it.

Greece narrowly avoided a chaotic default earlier this week
after thrashing out
yet another agreement with eurozone finance ministers
about cutting its public debt, but should these reserves be
proven, this could obviously enhance the country's debt
sustainability.

According to reports and based on evidence provided
to Greek prime minister Antonis Samaras, there could be up to
3.5 trillion cubic metres of natural gas in Greek waters off
Crete, equivalent to six years of aggregate EU gas
consumption.

That is a staggering volume of gas, if proven, and would
inevitably help reduce Greeces large energy import bill
(c.5% of GDP). Moreover, if the $600 billion valuation is to
be believed, this could be a boon for Greeces finances
too.

Mark Wall, economist at Deutsche Bank in London, said in a
report: Being one of the European economies with the
largest energy import bills, proving a natural resource
reserve could be especially significant for Greece. In 2011,
energy imports  in aggregate, that is, mineral fuels,
lubricants and related materials  cost 11
billion, about 5% of GDP."

He added: In light of the sovereign debt crisis,
discovery of a significant natural resource asset could be a
fortuitous counterbalance to Greeces sovereign debts
... If proven, natural resource reserves could enhance Greek
debt sustainability.

However, Wall urges caution on the actual volume of reserves,
and the difficult and drawn out exploration and extraction
process.

We stress both the uncertainties inherent in natural
resource exploration as well as the inevitably lengthy
timescale for development of any proven reserves, he
noted. Even if reserves are found and proven, they are
unlikely to be relevant to the resolution of the Greece
crisis for several years at least.

The Greek government has reportedly sponsored preliminary
seismology on the area in question, and a report is expected
mid-2013.

What is fact is that Greece has sizeable undersea terrain in
the Mediterranean, and several Mediterranean countries have
discovered and are exploiting undersea natural
resources.

For example, geologists suggest Greece could have reserves
that might be as significant as those in the Levantine Basin
in the eastern Mediterranean, which the US Geological Survey
estimates has reserves of 3.45 trillion cubic metres. It
is this figure that forms the basis of the statistics being
quoted in the press on the potential size of Greeces
reserves.

Assuming a reasonable industry rule of thumb that a
quarter of this economic value is absorbed by the cost of
production, another quarter is the profit margin for the
production company and half is the beneficial
governments tax take, this reserve, if proven and fully
exploited, could yield the Greek government 214 billion
or 107% of GDP, according to Wall.

To put the 107% of GDP value estimate into context, Greek
gross public debt was 170.6% of GDP in 2011. The
troikas objective is to get this down to
120% of GDP in 2020, about the time when reserves might
be starting to be exploited.

Greece is still some way off proving and extracting any
economic value from the reserves, but Wall says the country
could derive two benefits should this happen.

On one hand it could make the sovereign debt burden more
manageable and therefore secure euro membership. And on the
other, it might provide a cushion to the economy should the
country exit the eurozone.

From this perspective, the optimal size of natural
resource reserves would be large enough to contribute to the
stabilization of debt and the economy but not so large as to
afford Greece a go-it-alone strategy, Wall
concluded.

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